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Glossary

Glossary

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Technical terms, unfortunately, cannot always be avoided – particularly when it comes to complex topics such as monetary policy. This is why we have compiled a glossary with a wide range of terms, arranged in alphabetical order and each with a short explanation.

The Financial Market Stabilisation Development Act defines a bad bank as a special-purpose vehicle for cleansing bank balance sheets. Under this legislation, an ailing credit institution can offload financial assets with severe impairment risk to a bad bank, subject to certain requirements and conditions being met. In return, the credit institution receives a debt security from the bad bank for the same amount. The Federal government guarantees this debt security by way of the Financial Market Stabilisation Fund (SoFFin), and the credit institution pays a fee to SoFFin for this guarantee. This transaction allows the credit institution to shield itself against further write-downs and to reduce its regulatory capital requirements. The government-guaranteed debt securities are, moreover, eligible as collateral in the Eurosystem's refinancing operations. From a regulatory perspective, a bad bank is not a credit institution which is subject to capital adequacy standards. In banking circles, the term "bad bank" differs from the legal definition and refers instead to a department within a credit institution which specialises in disposing of assets that are at risk of severe impairment.

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In a bail-in, an institution's creditors would be among those bearing any losses incurred. For instance, the insolvency of a country may mean that its creditors lose or surrender parts of their claims in accordance with a distribution key to be determined.

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A bail-out is a measure used to rescue an institution that is facing imminent insolvency by means of debt relief or provision of new third-party loans. Enterprises or government institutions alike can be bailed out.

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The balance of payments provides information on all the economic transactions between a given economy and the rest of the world over a certain period of time. The balance of payments comprises a number of sub-accounts: the current account, the capital account, the financial account and net errors and omissions. As the balance of payments is run according to the principle of double-entry bookkeeping, it is always balanced, formally speaking. If a balance of payments is said to be "unbalanced", this is normally a reference to the balance of a certain sub-account, usually the current account.

A balance sheet is showing and breaking down an enterprise's asset situation and capital structure as at a specified date. In a bank’s balance sheet, loans and receivables are shown as assets, for example, while deposit business is recorded among the liabilities. Special legal provisions govern the preparation of the annual accounts of banks and financial services institutions.

Balance sheet channel is the name given to a theoretical concept describing the effect of a monetary policy stimulus on the balance sheets of non-banks. This theory states, for instance, that an increase in central bank interest rates causes a decline in equity and bond prices, thus diminishing the value of potential loan collateral and curbing the ability of enterprises and households to take out loans. The balance sheet channel describes an aspect of the credit channel more precisely.

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A bank is a business enterprise that provides money-related services. Banks grant loans and thereby create deposit money. They fund their operations by accepting money from third parties (deposit business) or issuing debt securities. Other important tasks performed by banks include supplying the economy with cash, clearing and settling cashless payments and providing investment and securities-related services. In Germany, banks are enterprises that are permitted, pursuant to section 1 (1) of the German Banking Act (Kreditwesengesetz, or KWG), to conduct the banking business stated therein.

Bank debt securities are issued by banks as a means of obtaining medium and long-term funding. They can either be one-off or "tap" issues. Mortgage Pfandbriefe issued by mortgage banks are one kind of bank debt security.

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Headquartered in Basel, Switzerland, the BIS has the task of promoting cooperation among central banks and facilitating international payment settlements. It is the home of the Basel Committee on Banking Supervision, which works towards the international harmonisation of banking supervisory standards. The Financial Stability Board (FSB), whose secretariat is likewise housed at the BIS, coordinates at the international level the work of national financial authorities and international standard-setting bodies.

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The Bank Lending Survey (BLS) is a sample-based survey of commercial banks' lending policies which the Eurosystem has been conducting on a quarterly basis since January 2003 among selected banks. The BLS contains, above all, qualitative questions on developments in credit standards, terms and conditions of loans, and credit demand from enterprises and households.

Since 2015 all EU member states have been obliged to set up so-called resolution financing arrangements, generally in the form of resolution funds managed by the resolution authorities. Resolution funds are financed by bank levies raised in advance. All institutions are obliged to pay a yearly bank levy. The levy mainly consists of a basic contribution, which is based on the bank's size and is also adjusted according to the institution's risk profile.

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The Bank Recovery and Resolution Directive (BRRD) harmonises the tools used in the recovery and resolution of credit institutions in the EU. The BRRD stipulates that, should a bank fail, its shareholders and creditors should normally be first in line to absorb any risks and losses. Only then should a resolution fund financed by the entire banking industry (Single Resolution Fund, or SRF) step in. This "bail-in" of shareholders and creditors aims to ensure that a key tenet of the market economy – that of being liable for one's own losses – also applies to credit institutions. The rules set forth in the BRRD pertaining to the "liability cascade" are complex; in extreme cases, government institutions can still be financially involved in the recovery or resolution of an institution ("bail-out"). The Single Resolution Mechanism (SRM) is based on BRRD tools and, in turn, the SRM and SRF are among the pillars of the banking union. The SRM augments the Single Supervisory Mechanism (SSM).

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In Germany, banks are identified by means of an eight-digit bank sort code. The first three digits denote a bank's location, the fourth the bank or banking group itself. Bank sort codes were introduced by the banking industry and the Bundesbank in 1970 to facilitate the automation of cashless payments. In Germany, the completion of the Single Euro Payments Area (SEPA) project will see the bank sort code being integrated into the IBAN.

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A channel for the transmission of monetary impulses in order to influence the lending behaviour of banks. It is thought that monetary policy constraints cause small banks with low liquidity and capital resources to curb their credit supply particularly strongly, resulting in selective lending and, if the worst comes to the worst, a credit crunch. If interest rates were raised, only borrowers with particularly risky investment projects would ultimately be prepared to pay the higher rate of interest (adverse selection). However, as banks cannot assess the risk of the investment with certainty (due to incomplete information) but fear a high rate of default due to their low capitalisation, they instead prefer not to lend at all.

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Banking supervision has a public mandate to oversee the individual business operations of banks. Banks need to be supervised because they play a key role in the circulation of money in an economy. Banking supervision particularly aims to ensure the safety of the deposits entrusted to banks. Microprudential supervision of individual banks goes hand in hand with macroprudential supervision, which oversees the financial system as a whole and aims to ensure financial stability. In Germany, banking supervision is the responsibility of the Federal Financial Supervisory Authority (BaFin) in collaboration with the Deutsche Bundesbank.

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The banking system comprises the central bank and the commercial banks. Commercial banks operate either as universal or special-purpose banks. Universal banks are common in the German banking system and conduct many different types of banking business such as deposit, credit and securities business. They include commercial banks, savings banks and cooperative banks. Special-purpose banks include mortgage banks, building and loan associations, and credit institutions with special functions, which focus on particular business operations.

The banking union is a system of European institutions which, since its inception in November 2014, has comprised a Single Supervisory Mechanism (SSM) and, since the beginning of 2016, a Single Resolution Mechanism (SRM). It also has the purpose of enhancing harmonisation among national deposit guarantee schemes and, at a later date, of possibly comprising a common European deposit insurance scheme (EDIS). All euro area countries are members of this banking union, which has been implemented in increments since 2014. Other EU countries may also opt in if they wish, though none have done so up to now. The purpose of the banking union is to standardise and improve banking supervision in participating member states, to increase financial stability and to loosen the "doom loop" between financial sector debt and sovereign debt which, in the past, had exacerbated the crisis. To further harmonise the various national deposit guarantee schemes, in April 2014 the recast Deposit Guarantee Scheme Directive was adopted. Implementation in Germany was achieved by means of the Deposit Guarantee Act (Einlagensicherungsgesetz), which came into effect on 3 July 2015. The creation of an EDIS is currently being discussed at EU level.

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Banknotes are bills with fixed denomination amounts (paper money). They used to be issued by private banks but nowadays, this task is usually reserved for national central banks. In the euro area, euro banknotes are the only legal tender that is acceptable without restriction. Only Eurosystem central banks are allowed to circulate euro banknotes. The euro banknote series comprises the following denominations: €5, €10, €20, €50, €100, €200 and €500. Modern banknotes incorporate numerous special security features which make them very difficult to forge, and improve the detection of counterfeit notes. It is a criminal offence to forge banknotes or circulate counterfeits.

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A barter economy is a society without money or a comparable medium that fulfils its functions. Therefore, people have to exchange goods directly. The difficulty is finding someone who is offering exactly what you need and who also needs precisely what you yourself are offering. You must either spend a long time searching for a suitable partner or form chains of exchanges, which requires far more effort than having money as a common medium of exchange. In addition to this, it is hard to determine the exchange value of every good against every other good. As a result, trade is much more difficult or completely impossible.

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The Basel Committee on Banking Supervision develops internationally coordinated regulations for supervising the banking sector. The most important regulatory frameworks are known as Basel II and Basel III. Representatives of central banks and supervisory authorities from different countries are members of the Basel Committee on Banking Supervision. The committee is located at the Bank for International Settlements (BIS) in Basel.

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A comprehensive framework of rules, developed by the international Basel Committee on Banking Supervision, which sets a minimum level of capital needed to conduct banking business requiring a licence. Either a standardised approach may be used to calculate the minimum capital requirement, or banks may optionally do so using their own models, subject to approval by supervisors. The framework also requires banks to hold sufficient capital in order to cover losses from the risks they take. That, in turn, is predicated on a functional risk management framework, which is regularly reviewed and assessed by supervisors. Basel II also defines certain disclosure requirements in order to improve market discipline for banks and enhance transparency.

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Basel III is the name given to a comprehensive regulatory framework for the banking sector. Adopted by the Basel Committee on Banking Supervision in September 2010, it takes the Basel II rules a step further by requiring banks, amongst other things, to hold a greater quantity and quality of capital than under the Basel II framework, thereby significantly improving banks' resilience to losses they might suffer as a result of credit defaults, for instance. Basel III also defines bank liquidity standards and a minimum leverage ratio as well as a countercyclical capital buffer which supervisors can activate as part of their macroprudential mandate in order to bolster financial stability. The Basel III regime is a key element of a European Union legislative package which is better known as CRD IV/CRR (Capital Requirements Directive IV/Capital Requirements Regulation).

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The basic rate of interest pursuant to section 247 of the German Civil Code (Bürgerliches Gesetzbuch) is a reference variable for interest and other payments in relevant legislation (eg for calculating default interest). It is reset on 1 January and 1 July each year and lies 88 basis points (0.88%) below its reference variable, the interest rate of the most recent main refinancing operations (MRO) conducted by the European Central Bank at the date on which the basic rate of interest is reset. The basic rate of interest can have a negative value. The Bundesbank publishes the current basic rate of interest in the Federal Gazette (Bundesanzeiger) and on its website.

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The basic rate of interest is a reference variable for interest and other payments in pieces of legislation (e.g. for calculating default interest). It is reset on 1 January and 1 July each year and lies 88 basis points below its reference variable, the interest rate of the main refinancing operations (MRO) conducted by the European Central Bank (ECB). The Bundesbank publishes the current basic rate of interest in the Federal Gazette (Bundesanzeiger).

A basket of goods is a statistical measure used to determine the price level of a group of goods. To calculate the consumer price index (CPI) for Germany, the Federal Statistical Office uses a basket of goods based on households' typical expenditure on goods and services, in addition to the consumer price statistics collected each month. Since consumption habits change over time, statisticians are constantly updating the basket of goods. When structuring the basket, they not only have to select representative goods and services, but also determine their weighting in the basket. This weighting scheme is updated every five years. This is based on the fact that every five years, around 60,000 representative households selected keep precise records of their expenditure for goods and services over several months.

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German big banks include the financial and credit institutions Deutsche Bank and Commerzbank, which traditionally operate thoughout the country. UniCredit Bank AG (formerly Bayerische Hypo- und Vereinsbank) joined this group of banks in early 1999, Postbank in December 2004.

A bill of exchange is a security in which the debtor ("drawee") undertakes to pay a certain amount at a certain point in time on presentation of the bill of exchange. A bill of exchange is not just a payment transaction instrument, but also a means of acquiring credit and security. In modern banking, bills of exchange have declined in importance as against other financial instruments.

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Bitcoin is a type of crypto token: that is to say, a unit of value which is available solely in a digital format and which works on the basis of encryption technology. All transactions and processes that are used to create and transfer Bitcoin are stored in a huge database, known as the blockchain, which is based on distributed ledger technology. Bitcoin is not legal tender, does not exist in cash form and cannot fulfil most monetary functions.

The concept of Bitcoin was first described in 2008. The aim was to create a currency that is independent of government institutions and commercial banks. These days, it is mainly used for speculation.

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Blockchain is a tool used for storing transaction data, which became known in particular in connection with the crypto token Bitcoin. This technology forms the basis for a decentralised database in which all transactions and processes that are used to create and transfer Bitcoin are stored. This allows each miner – ie the participants who verify all the transactions – to retrace the entire history of each Bitcoin and to check each transaction to see whether the transferring entity is authorised to draw on the account. This prevents a participant from issuing the same Bitcoin twice. In addition, the decentralised storage of data on several computers makes it more difficult to manipulate the data. Blockchain works on the basis of distributed ledger technology, which is now also being researched in numerous other economic areas – independently of Bitcoin – and is already being used in some cases.

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The bond market is that part of the capital market in which bonds or, to be more specific, bond units are traded. A bond's current price is set by supply and demand. The current market price, the agreed interest rate, the residual term to maturity and other factors are used to determine a bond's current market return, which can be higher or lower than the agreed rate of remuneration. An increase in a bond's price reduces its market return, and vice versa. The bond market hosts many different types of bonds, such as fixed-interest bonds or debt securities whose remuneration is adjusted periodically ("variable-rate bonds"). Given that government bonds are typically thought of as having the lowest risk of default in an economy, their returns are used as a yardstick or "benchmark" for the maturity segment in question.

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Book money is the term used to denote deposits at banks which were created through postings in the banks' account books. Although book money is not legal tender, it is widely accepted as a means of payment, notably because book money can be converted into cash. Book money can be used to make payments via cashless payment instruments such as credit transfers, direct debits and bank or credit cards (plastic money). Since cashless payments circulate book money from one bank account to another, this money is sometimes also referred to as giro money (from the Italian word "giro", meaning circulation).

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In a borrower's note loan, a medium to long-term large loan is usually granted in return for a certificate – the borrower's note. Borrower's note loans are used mainly by enterprises and public sector entities to raise funds. Upon redemption, the borrower is entitled to reclaim the borrower’s note. A borrower's note is not a security: instead of being accounted for as a security at fluctuating market prices, it is recognised as a loan.

In the Bretton Woods system – named after a resort in the US state of New Hampshire where the conference was held – 44 states agreed in July 1944 on an international currency system of fixed exchange rates pegged to the reserve currency, the US dollar. The United States agreed to exchange US dollars for gold at a fixed rate of US$35/troy ounce (this increased to US$38 as of December 1971) of gold at any time (guarantee of gold convertibility). The conference also agreed to set up the International Monetary Fund (IMF) and the World Bank. The Federal Republic of Germany joined this system after it was founded in 1949. The Bretton Woods system remained in force until 1973.

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This term refers to brokers in general, especially those working on the stock exchange. Brokers mediate between those demanding and those supplying a good. In return, they receive a broker’s fee, known as the brokerage or (for stock exchange transactions in Germany) courtage. A broker may also transact stock exchange orders on behalf of customers or trade securities.

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Building and loan associations are special-purpose banks that finance private construction projects. They take deposits from households under savings and loan contracts and grant low-interest loans to savers to finance their private building projects once the savings phase is complete.

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Government measures to smooth over economic fluctuations and to counteract their negative effects. The Act to Promote Economic Stability and Growth (Stabilitätsgesetz) of 1967 provides a catalogue of measures for this, which were employed particularly in the first half of the 1970s. In the wake of the recent financial and economic crisis, too, extensive economic support measures were launched.

The BIC is a unique international bank sort code used to clearly identify a specific bank worldwide. It is made up of 8 or 11 characters. Use of the BIC was mandatory for SEPA credit transfers and direct debits until February 2016 within die European Economic Area (EEA). However, for cross-border SEPA payments to Monaco, Saint Pierre, Miquelon, San Marino and Switzerland the BIC in addition to the International Bank Account Number (IBAN) is still mandatory.